-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R6b0P/O5hac4E9PIWoMUlna4vzj3/MNSwkaxEn0Vw4l0uG18Vv7oph2kArkNY8cO OtxR+8zdBFNv6LvVxYVJng== 0001005477-99-001483.txt : 19990412 0001005477-99-001483.hdr.sgml : 19990412 ACCESSION NUMBER: 0001005477-99-001483 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN BILTRITE INC CENTRAL INDEX KEY: 0000004611 STANDARD INDUSTRIAL CLASSIFICATION: 3060 IRS NUMBER: 041701350 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04773 FILM NUMBER: 99578325 BUSINESS ADDRESS: STREET 1: 57 RIVER STREET CITY: WELLESLEY HILLS STATE: MA ZIP: 02181 BUSINESS PHONE: 6172376655 MAIL ADDRESS: STREET 1: 57 RIVER STREET CITY: WELLESLEY HILLS STATE: MA ZIP: 02181 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN BILTRITE RUBBER CO INC DATE OF NAME CHANGE: 19730621 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File Number 1-4773 - - ------------------------- -------- AMERICAN BILTRITE INC. - - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-1701350 - - -------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 57 River Street, Wellesley Hills, Massachusetts 02481-2097 (Address of principal executive offices) (Zip Code) - - -------------------------------------------------- --------------- Registrant's telephone number, including area code: (781) 237-6655 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ---------------- Common Stock, $.01 Par Value American Stock Exchange - - ---------------------------- ----------------------- Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the voting stock of the registrant held by non-affiliates as of March 10, 1999 was $43,423,000. The number of shares outstanding of each of the registrant's classes of common stock as of March 10, 1999 was 3,646,976 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual meeting of stockholders to be held on May 5, 1999 are incorporated by reference into Part III. PART I ITEM 1. BUSINESS (a) General Development of Business. American Biltrite Inc. ("ABI") was organized in 1908 and is a Delaware corporation. ABI operates domestically directly through two businesses, the Tape Division and K&M Associates L.P., a Rhode Island limited partnership ("K&M"), and conducts operations indirectly through Congoleum Corporation ("Congoleum"), a company in which ABI owns a controlling interest. The Tape Division produces adhesive-coated, pressure-sensitive papers and films used to protect material during handling or storage or to serve as a carrier for transferring decals or die-cut lettering. The Division also produces pressure sensitive tapes and adhesive products used for applications in the heating, ventilating and air conditioning (HVAC), footwear, automotive and electrical and electronic industries. In 1995, ABI acquired a controlling interest in K&M, a national supplier, distributor and servicer of a wide variety of adult, children's and specialty items of fashion jewelry and related accessories. ABI, through wholly owned subsidiaries, currently owns an aggregate 82.25% interest (7% as sole general partner and 75.25% in limited partner interests) in K&M. K&M wholesales its products to mass merchandisers and other major retailers. It also services certain retail merchandisers' in-store operations in fashion jewelry and related accessories departments by assisting retailers in managing inventory and maintaining displays. At the beginning of 1995, ABI indirectly held an 8% limited partner interest in K&M. During 1995 and in January of 1996, the Company acquired, through a series of transactions by its wholly owned subsidiaries, an additional 67.25% in limited partner interests and a 7% sole general partner interest in K&M for an aggregate consideration of $15.5 million in cash, notes and ABI common stock. In conjunction with these K&M transactions, a wholly owned subsidiary of ABI also entered into agreements with the remaining limited partners of K&M which provide the ABI subsidiary with the option to buy, and the limited partners the option to sell, the limited partners' respective remaining interests in K&M for an aggregate consideration calculated in accordance with a predetermined formula which is based in part on such limited partner's capital account balance at the time of sale. As of the date hereof, based on K&M capital account balances as of December 31, 1998, the aggregate purchase price under the option agreements for the remaining limited partner interests in K&M would be $3.0 million. See Note 4 of Notes to the Consolidated Financial Statements. ABI owns a 49% equity interest in Congoleum Corporation ("Congoleum"), a manufacturer and producer of resilient floor tile and sheet vinyl flooring. 2 On February 8, 1995, Congoleum completed a public offering of 4,650,000 shares of Class A Common Stock at $13 per share. The net proceeds of the offering, together with certain other funds of Congoleum, were used to acquire a portion of Congoleum's outstanding Class B Common Stock held by Hillside Industries Incorporated. In conjunction with the transaction, ABI exchanged its then existing shares of Class B Common Stock for 4,395,605 shares of a new series of Class B Common Stock. The exchange of stock did not change the Company's 44% equity ownership interest; however, the new shares represented 57% of the voting power of the outstanding shares of Congoleum, giving ABI majority voting control. The accounts of Congoleum have been consolidated with the financial statements of ABI since 1995. During 1997 and 1998, Congoleum's Board of Directors approved a plan to repurchase up to $15,000,000 of Congoleum's common stock (Class A and Class B shares). Under the total plan, Congoleum has repurchased $9,763,000 of common stock at fair market value. The effect of the repurchase of shares was to increase ABI's ownership interest from 44% to 49%. In addition, as of December 31, 1998, ABI's ownership of 4,395,605 shares of Congoleum's Class B common stock represented 64% of the voting control of Congoleum. Outside the United States, in addition to international sales of Tape Division products, the Division operates facilities in Belgium and Singapore where bulk tape products are converted into various sizes to quickly respond to customer demands in the European and Asian markets. Other international operations include: a wholly owned Canadian subsidiary ("ABI-Canada") which produces resilient floor tile, rubber tiles and Uni-Turf (a vinyl-based floor covering for use in indoor sports facilities) under license from ABI and industrial products (including conveyor belting, truck and trailer splash guards and sheet rubber material); a 50% direct equity interest in a Honduran producer of footwear components; and, through the Honduran corporation, an indirect interest in a Guatemalan foam product manufacturer. For financial reporting purposes, as a result of the consolidation of the accounts of Congoleum and K&M into the financial statements of ABI, ABI operates in four industry segments: flooring products, tape products, jewelry and the Canadian division which produces flooring and rubber products. See Note 15 of Notes to the Consolidated Financial Statements, set forth in Item 8 below. (b) Financial Information about Industry Segments. Business segment information is in Note 15 of Notes to the Consolidated Financial Statements, set forth in Item 8 below. (c) Narrative Description of Business. Marketing, Distribution and Sales. The Tape Division's protective papers and films are sold domestically and throughout the world, principally through distributors, but also directly to certain manufacturers. Other tape products are marketed through the division's own sales force and by sales representatives and 3 distributors throughout the world. ABI's Belgian and Singapore facilities sell these products throughout Europe and the Far East. The business and operations of the Tape Division do not experience seasonal variations, and neither this division nor the industry in which it operates has any material practices with respect to working capital. The products of K&M are sold domestically and throughout the world through its own direct sales force and, indirectly, through a wholly owned subsidiary and through third-party sales representatives. K&M's business and operations experience seasonal variations. In general, fashion jewelry supply, distribution and service businesses respond to the seasonal demands of mass merchandisers and other major retailers, which typically peak in preparation for end-of-year holiday shopping. Accordingly, K&M's working capital needs tend to be greatest in the second and third fiscal quarters, while its revenues tend to be greater toward the end of each fiscal year, especially in the latter part of the third quarter and the first half of the fourth quarter. ABI-Canada's floor tile and rubber tile products are marketed in Canada and the United States, principally through distributors and to commercial installers. Uni-Turf is marketed in Canada and internationally through distributors. ABI-Canada's industrial products are marketed in Canada and the United States through distributors and also directly to certain large end-users and original equipment manufacturers. Congoleum currently sells its products through distributors in the United States and Canada, as well as directly to a limited number of mass market retailers. Congoleum considers its distribution network to be very important to maintaining competitive position. While most of its distributors have marketed Congoleum's products for many years, replacements are necessary periodically to maintain the strength of the distribution network. Although Congoleum has more than one distributor in some of its distribution territories and actively manages its credit exposure to its customers, the loss of a major customer could have a materially adverse impact on Congoleum's sales, at least until a suitable replacement is in place. The sales pattern for Congoleum's products is seasonal, with peaks in retail sales typically occurring during March/April/May and September/October. Orders are generally shipped as soon as a truckload quantity has been accumulated, and backorders can be canceled without penalty. ABI owns 50% of Compania Hulera Sula, S.A. de C.V. ("Hulera Sula"), a Honduran corporation, which produces soles, heels, molded soles and heels, sandals and other footwear products under license from ABI and markets such products in certain Central American countries. Hulera Sula owns 100% of Hulera Sacatepequez, S.A., a Guatemalan corporation which manufactures and markets products in Guatemala similar to those of Hulera Sula. Fomtex, S.A., a Guatemalan corporation 60% owned by Hulera Sula, manufactures and 4 markets foam mattresses, beds and other foam products for sale in the Central American market. Working Capital and Cash Flow. In general, ABI's working capital requirements are not affected by accelerated delivery requirements of major customers or by obtaining a continuous allotment of raw material from suppliers. ABI does not provide special rights for customers to return merchandise and does not provide special seasonal or extended terms to its customers. K&M does provide pre-approved allowances in the form of markdowns and return authorizations for end of season merchandise in their service stores. Congoleum produces goods for inventory and sells on credit to customers. Generally, Congoleum's distributors carry inventory as needed to meet local or rapid delivery requirements. Credit sales are typically subject to a discount if paid within terms. Raw Materials. Basically, all of ABI's products are internally designed and engineered. Generally, the raw materials required by ABI for its manufacturing operations are available from multiple sources and, as such, ABI has not been dependent on any particular source of supply for raw materials essential to its businesses. ABI's subsidiary, Congoleum, does not have readily available alternative sources of supply for specific designs of transfer print paper, which are produced utilizing print cylinders engraved to Congoleum's specifications. Although no loss of this source of supply is anticipated, replacement could take a considerable period of time and interrupt production of certain products. Congoleum maintains a raw material inventory and has an ongoing program to develop new sources which will provide continuity of supply for its raw material requirements. Competition. All businesses in which ABI is engaged are highly competitive. ABI's tape products compete with some of the largest fully integrated rubber and plastic companies, as well as smaller producers. Included among their competitors are Minnesota Mining & Manufacturing Company, Permacel and Shuford Mills, Inc. ABI-Canada's flooring products compete with those of other manufacturers of rubber and vinyl floor tiles and with all other types of floor covering. ABI-Canada competes with Armstrong World Industries, Inc., Domco Industries,Ltd., Mondo Rubber International, Inc. and with other manufacturers of alternate floor covering products. In the rubber products category, ABI-Canada has several competitors, principal among them being Goodyear Canada, Inc. The market for Congoleum's products is highly competitive. Resilient sheet and tile compete for both residential and commercial customers primarily with carpeting, hardwood, melamine laminate and ceramic tile. In residential applications, both tile and sheet products are used primarily in kitchens, bathrooms, laundry rooms and foyers and, to a lesser extent, in playrooms and basements. Ceramic tile is used primarily in kitchens, bathrooms 5 and foyers. Carpeting is used primarily in bedrooms, family rooms and living rooms. Hardwood flooring and melamine laminate are used primarily in family rooms, foyers and kitchens. Commercial grade resilient flooring faces substantial competition from carpeting, ceramic tile, rubber tile, hardwood flooring and stone in commercial applications. Congoleum believes, based upon its market research, that purchase decisions are influenced primarily by fashion elements such as design, color and style, durability, ease of maintenance, price and ease of installation. Both tile and sheet resilient flooring are easy to replace for repair and redecoration and, in Congoleum's view, have advantages over other floor covering products in terms of both price and ease of installation and maintenance. Congoleum encounters competition from domestic and, to a much lesser extent, foreign manufacturers. Certain of Congoleum's competitors, including Armstrong in the resilient category, have substantially greater financial and other resources than Congoleum. K&M competes with other companies making similar products on the basis of product pricing and the effectiveness of merchandising services offered. In assessing the effectiveness of K&M products and services, customers tend to focus on margin dollars realized from the sales of product and return on inventory investment needed to generate sales. In its business of supplying and servicing fashion jewelry and accessory products, K&M competes with a variety of suppliers, among them are AAi. Foster Grant, Monet Inc., Victoria Creations Inc. and a number of other companies offering similar products and/or services. K&M also competes with numerous importers and overseas suppliers of similar items. Research and Development. Research and development efforts of both ABI and Congoleum concentrate on new product development and expanding technical expertise in the various manufacturing processes. ABI also focuses on improving existing products. Congoleum also concentrates on ways to increase product durability. Expenditures for research and development were $5,175,000, $5,388,000 and $5,513,000 on a consolidated basis for the years ended December 31, 1998, 1997 and 1996, respectively. Key Customers. For the year ended December 31, 1998, two customers of Congoleum each accounted for over 10% of ABI's consolidated sales revenue. These customers were its distributor to the manufactured housing market, LaSalle-Bristol, and its distributor in the Western U.S., LD Brinkman & Co. K&M sales during 1998 included sales to large customers which accounted for less than 10% of ABI's consolidated sales revenue. K&M's top three customers in terms of net sales in 1998 together account for approximately 94% of K&M's aggregate net sales, and the loss of any such customer would have a material adverse effect on K&M. See Note 15 of Notes to Consolidated Financial Statements set forth in Item 8 below. 6 Backlog. The dollar amount of backlog of orders believed to be firm as of December 31, 1998 and 1997 was $21,800,000 and $15,600,000, respectively. It is anticipated that all of the backlog as of December 31, 1998 will be filled within the current fiscal year. There are no seasonal or other significant aspects of the backlog. In the opinion of management, backlog is not significant to the business of ABI. Environmental Compliance. Because of the nature of the operations conducted by ABI, ABI's facilities are subject to a broad range of federal, state, local and foreign legal and regulatory provisions relating to the environment, including those regulating the discharge of materials into the environment, the handling and disposal of solid and hazardous substances and wastes and the remediation of contamination associated with releases of hazardous substances at ABI facilities and off-site disposal locations. ABI believes that compliance with these federal, state, local and foreign provisions will not have a material effect upon its capital expenditures, earnings and competitive position. Due to the nature of Congoleum's business and certain of the substances which are or have been used, produced or discharged by Congoleum, Congoleum's operations are subject to extensive federal, state and local laws and regulations relating to the generation, storage, disposal, handling, emission, transportation and discharge into the environment of hazardous substances. Congoleum, pursuant to administrative consent orders signed in 1986 and in connection with a prior restructuring, is in the process of implementing cleanup measures at its Trenton sheet facility under New Jersey's Environmental Clean-up Responsibility Act, as amended by the New Jersey Industrial Site Recovery Act. Congoleum does not anticipate that the additional costs of these measures will be material. In connection with the acquisition of the Tile Division, American Biltrite signed a similar consent order with respect to the Trenton tile facility, and Congoleum agreed to be financially responsible for any cleanup measures required. In 1998, Congoleum incurred capital expenditures of approximately $.3 million for environmental compliance and control facilities. Congoleum has historically expended substantial amounts for compliance with existing environmental laws and regulations, including those matters described above. Congoleum will continue to be required to expend amounts in the future, due to the nature of historic activities at its facilities, to comply with existing environmental laws, and those amounts may be substantial but should not, in Congoleum's judgment, have a material adverse effect on the financial position of Congoleum. Because environmental requirements have grown increasingly strict, however, Congoleum is unable to determine the ultimate cost of compliance with environmental laws and enforcement policies. See Item 3 below for certain additional information regarding environmental matters. 7 Employees. As of December 31, 1998, ABI employed approximately 3,010 people. (d) Financial information about foreign and domestic operations and export sales. Financial information concerning foreign and domestic operations is in Note 15 of Notes to the Consolidated Financial Statements, set forth in Item 8 below. Export sales from the United States were $20,886,000 in 1998, $23,008,000 in 1997 and $17,931,000 in 1996. ITEM 2. PROPERTIES At December 31, 1998, ABI and Congoleum operated a total of nine manufacturing plants, and ABI operated a jewelry product distribution warehouse, as follows: Owned Industry Segment or For Which Location Square Feet Leased Properties Used - - -------- ----------- ------ --------------- Trenton, NJ 1,050,000 Owned Flooring products Marcus Hook, PA 1,000,000 Owned Flooring products Trenton, NJ 282,000 Owned Flooring products Finksburg, MD 107,000 Owned Flooring products Sherbrooke, 330,000 Owned Canadian division Quebec Moorestown, NJ 226,000 Owned Tape products Lowell, MA 57,000 Owned Tape products Renaix, Belgium 84,000 Owned Tape products Singapore 32,000 Owned Tape products Providence, RI 103,000 Owned Jewelry products ABI knows of no material defect in the titles to any such properties or material encumbrances thereon. ABI considers that all of its properties are in good condition and have been well maintained. It is estimated that during 1998, ABI's plants for the manufacture of floor covering products operated at approximately 76% of aggregate capacity, its plants for the manufacture of tape products operated at approximately 97% of aggregate capacity and the Canadian division operated at approximately 79% of aggregate capacity. All estimates of aggregate capacity have been made on the basis of a five-day, three-shift operation. 8 ITEM 3. LEGAL PROCEEDINGS ABI is a co-defendant with many other manufacturers and distributors of asbestos-containing products in approximately seventy-nine pending claims involving approximately 590 individuals as of December 31, 1998. These claims allege personal injury from exposure to asbestos or asbestos-containing products. See Note 10 to the Consolidated Financial Statements included in Item 8 for detailed information about these claims. ABI has been named as a Potentially Responsible Party ("PRP") within the meaning of the federal Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), as to two sites in two separate states. See Note 10 to the Consolidated Financial Statements included in Item 8 for detailed information about these matters. In addition, ABI has been named as a defendant in two environmental lawsuits the details of which are set forth in Note 10 to the Consolidated Financial Statements included in Item 8. ABI also is potentially responsible for response and remediation costs as to four state supervised sites, two sites in Massachusetts, and one each in New York and New Jersey. See Note 10 to the Consolidated Financial Statements included in Item 8 for information about ABI's potential liability at these four sites. As of December 31, 1998, ABI has accrued $1.2 million for its estimable and probable amounts for contingencies described above. As of December 31, 1998 Congoleum was named as a defendant, together in most cases with numerous other defendants, in approximately 657 pending lawsuits (including workers' compensation cases) involving approximately 1,984 individuals alleging personal injury from exposure to asbestos or asbestos-containing products. See Note 10 to the Consolidated Financial Statements included in Item 8 for information about Congoleum's potential liabilities to these lawsuits. Together with a large number (in most cases, hundreds) of other companies, Congoleum is named as a PRP in pending proceedings under CERCLA and similar state laws. See Note 10 to the Consolidated Financial Statements included in Item 8 for detailed information about these matters. Congoleum is also a party to a pending proceeding relating to the investigation and potential remediation of soil and groundwater contamination at its manufacturing facility located at 1945 East State Street in Trenton, New Jersey. The investigation of the nature and extent of any contamination at this site has not been completed and Congoleum is therefore unable to estimate the amount, if any, of its probable liability with respect to the potential remediation of this site. 9 In the ordinary course of its business, ABI and its consolidated entities become involved in lawsuits, administrative proceedings, product liability and other matters. In some of these proceedings, plaintiffs may seek to recover large and sometimes unspecified amounts and the matters may remain unresolved for several years. On the basis of information furnished by counsel and others, ABI and its consolidated entities do not believe that these matters, individually or in the aggregate, will have a material adverse effect on their business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The registrant's Common Stock is traded on the American Stock Exchange (ticker symbol: ABL). The approximate number of record holders of ABI's Common Stock at March 10, 1999 was 440. High and low stock prices and dividends for the last two years were: Sales Price of Common Shares ---------------------------- 1998 1997 Quarter ---- ---- Ended High Low High Low ----- ---- --- ---- --- March 31 31 3/4 23 5/8 26 21 1/8 June 30 31 3/4 29 1/4 25 5/8 20 1/2 September 30 30 7/8 22 1/4 24 3/8 17 7/8 December 31 24 1/4 20 1/2 26 7/8 19 1/2 Cash Dividends Per Common Share ------------------------------- Quarter Ended 1998 1997 ------- ---- ---- March 31 $ .10 $ .10 June 30 .10 .10 September 30 .125 .10 December 31 .125 .10 ------ ----- $ .45 $ .40 ====== ===== 10 ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31, ----------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except per share data) Net sales $423,879 $417,512 $417,961 $404,473 $106,145 Earnings before other items 15,321 11,922 13,103 10,811 4,900 Non-controlling interests (5,145) (3,777) (6,804) (4,706) Equity in earnings of joint venture 7,361 Extraordinary item (1,174) Net earnings 9,002 8,145 6,299 6,105 12,261 Total assets 336,039 299,686 324,966 303,487 82,804 Long-term debt 118,406 94,409 106,721 110,919 4,188 Number of shares used in computing basic earnings per share 3,641,337 3,633,076 3,645,089 3,619,198 3,560,471 Basic earnings per share 2.47 2.24 1.73 1.69 3.44 Cash dividends per common share .45 .40 .40 .35 .14375
Congoleum Corporation is included in the consolidated results since 1995 and is reported as a joint venture in 1994. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Net sales for the year ended December 31, 1998 were $423.9 million as compared to $417.5 million for the year ended December 31, 1997, an increase of $6.4 million or 1.5%. The major portion of this sales increase occurred at Congoleum Corporation in improved sales to the manufactured housing industry and to home centers. Sales from K&M Associates L.P. ("K&M") increased over last year due to a full year of sales to a major customer we started servicing for the first time in the latter half of 1997. Sales at ABI's Tape and Canadian divisions reflect slight decreases compared to last year. Interest income increased to $1.8 million in 1998 from $1.6 million in 1997 due to increases in funds available for short-term investment at both Congoleum and ABI's Canadian division. Other revenues increased by $.8 million in 1998 to $1.9 million from $1.1 million last year. The major reason for this positive shift is due to the improvement of the value of the Belgian franc compared to the U.S. dollar during the course of 1998 which favorably impacted ABI's operation in Belgium. Cost of products sold in 1998 deceased to 68.5% of net sales from 69.4% last year. This decrease in cost is mainly attributable to the results at Congoleum where they experienced declines in raw material costs, increases in manufacturing productivity and a higher-margin mix of sales. At both ABI and K&M, cost of products sold as a percentage of net sales were at the same levels as last year. Selling, general and administrative expenses as a percentage of net sales were 24.3% for 1998 and 24.4% for 1997. At Congoleum, expenses in this area decreased as a result of expense control initiatives partially offset by increased spending related to Year 2000 compliance. At K&M, costs increased due to increases in field sales expense to service additional sales volume. At ABI, slight cost increases were also generated covering Year 2000 compliance in addition to increases in field sales and advertising/promotion expenses. Interest expense decreased to $9.0 million in 1998 from $9.3 million in 1997. This decrease occurred at both ABI and K&M due to a reduction in outstanding indebtedness. This was partially offset by an interest expense increase at Congoleum primarily due to a lower amount of interest being capitalized rather than expensed in connection with capital expenditures in 1998. 12 During 1998, Congoleum issued $100 million in ten year 8 5/8% Senior Notes and used most of the proceeds to repay its outstanding 9% Senior Notes due 2001 in the principal amount of $76.6 million, together with accrued interest, prepayment premiums and financing fees and expenses. Congoleum recorded an extraordinary after tax charge of $2.4 million of which ABI recorded $1.2 million, reflecting our 49% ownership interest in Congoleum. Net income for the year ended December 31, 1998 was $9.0 million, up by $.9 million over last year's net income of $8.1 million. ABI, Congoleum and K&M were all profitable in 1998. Basic net earnings per share was $2.47 in 1998, up from $2.24 in 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Net sales for the year ended December 31, 1997 were $417.5 million as compared to $418.0 million for the year ended December 31, 1996. Although consolidated net sales between years were relatively flat, there were significant swings between the various operations of ABI. The largest positive swing was increased sales volume at K&M where shipments were made to more than 1900 additional stores for a major customer who previously had been serviced by K&M at approximately 200 of its stores. K&M currently is servicing the entire 2100 stores for this customer under a long-term contractual arrangement. At Congoleum, sales decreased from lower average selling prices due to competitive pressures, loss of sales to a major retail customer who ceased operations in mid 1997, and an inventory reduction by Congoleum's largest distributor. Sales at ABI's Tape and Canadian divisions reflect increases over last year. Other revenues decreased by $1.3 million in 1997 to $1.1 million from $2.4 million last year. The factors that caused the decrease included a decrease in commission income at K&M, foreign exchange losses at our ABI Belgian operation and reduced Royalty income at Congoleum. ABI's foreign operations are limited and conducted in countries that historically have had stable currencies. The strong U.S. dollar in relation to the Belgian franc in 1997 did penalize our operation in Belgium by approximately $.5 million. ABI continues to believe that future movements of foreign currency exchange rates would not significantly affect its consolidated results of operations. Cost of products sold in 1997 increased to 69.4% of net sales from 68.5% last year. This increase in cost is attributable to the results at Congoleum where margins decreased as a result of higher raw material costs, a less profitable mix of products sold, and manufacturing inefficiencies experienced preparing for the overhaul of a major production line. At both ABI and K&M, cost improvements were experienced, but were not sufficient to cover the cost increases at Congoleum. 13 Selling, general and administrative expenses decreased slightly to 24.4% of net sales compared to 24.7% last year. Decreases in sales-related costs and incentive compensation at Congoleum more than offset increased spending for merchandising displays. At K&M, the increased sales volume experienced in 1997 had the effect of reducing the sales percentage relationship to expenses in this area. Interest expense decreased $1.4 million in 1997 to $9.3 million from $10.7 million in 1996. This decrease occurred at Congoleum as a result of lower average debt outstanding and a greater amount of interest capitalized in connection with capital expenditures in 1997. The provision for income taxes declined to 38% of pretax income in 1997 from 40% in 1996 as a result of the lower income level at Congoleum, which reduced the average effective statutory rate and lower effective state income tax rates. Net income for the year ended December 31, 1997 was $8.1 million, up by $1.8 million over last year's net income of $6.3 million. ABI, Congoleum and K&M were all profitable in 1997. K&M operated at a loss in 1996 and Congoleum's contribution to net earnings was greater in 1996. Basic net earnings per share was $2.24 in 1997, up from $1.73 in 1996. Liquidity and Capital Resources At December 31, 1998, consolidated working capital was $96.7 million, the ratio of current assets to current liabilities was 2.3 to 1, and the debt to equity ratio was 1.66 to 1. Influencing the debt to equity ratio is $99.5 million of Congoleum debt as to which there exists no recourse to ABI. Net cash provided by operations during 1998 was $39.3 million, generated mainly from net earnings and depreciation. Capital expenditures for 1999 are estimated to be in the range of $24 to $26 million. At ABI, capital expenditures cover normal replacement of machinery and equipment and process improvements. Congoleum is proceeding with a major program to modernize and improve its plant and equipment. Because of these programs at Congoleum, capital expenditures are expected to continue at this level for the next two years. Depreciation and amortization expense is forecast at $15.0 million. In 1998, Congoleum's Board of Directors approved a plan to purchase up to $5 million of Congoleum's common stock. As of December 31, 1998, Congoleum had repurchased 24,190 shares of its common stock for an aggregate cost of $0.2 million pursuant to this plan. At ABI, based on a prior Board of Directors authorization, $4.7 million is available for the purchase of ABI's common stock as of December 31, 1998. In 1996, the Company began the initial planning of a comprehensive initiative to address the impact of the Year 2000 on its information and equipment systems. The Company organized a Year 14 2000 oversight team to develop a strategy of evaluation, implementation, testing and contingency planning to address the Company's Year 2000 readiness. The evaluation phase involved performing a complete, company-wide inventory to identify all internal, general purpose and production hardware and software systems, as well as any embedded logic devices used to control equipment or facilities, that required modification to become Year 2000 compliant. In addition to the Company's internal assessment, the Company communicated with all its key customers and all key third-party suppliers of goods and services to determine their states of Year 2000 readiness, implementation of Year 2000 compliant systems and related contingency plans. In the second quarter of 1997, the Company began the implementation and testing phase of replacing or modifying system hardware, software and devices. As of January 1999, the Company has completed work on 82% of the systems identified as requiring modification. The Company anticipates that substantially all of its systems will be Year 2000 compliant by the beginning of the fourth quarter of 1999. Costs directly associated with achieving Year 2000 compliance, including modifying computer software or converting to new programs, consist of payments to third parties as well as an allocation of the payroll and benefits of its employees based on the amount of their time devoted to this activity. These costs are expensed as incurred. Costs for new hardware are capitalized in accordance with the Company's fixed asset policy, and any equipment retired is written off. The following table summarizes the Company's direct Year 2000 compliance expenditures (actual and planned) by year (in thousands): 1997 1998 1999 ---- ---- ---- Expenses paid to third parties $307 $462 $376 Allocated payroll costs 457 533 251 Capital expenditures 120 415 196 In addition to work undertaken explicitly to achieve Year 2000 compliance, the Company has replaced or upgraded a number of systems in the ordinary course of business where the replacement or upgrade will, in addition to its primary benefits, also provide Year 2000 compliance. The nature of these costs, and their accounting treatment, is the same as described above. The following table summarizes the Company's actual or planned expenditures on systems improvements undertaken for reasons unrelated to the Year 2000, but also serving to achieve Year 2000 compliance (in thousands): 1997 1998 1999 ---- ---- ---- Expenses paid to third parties $118 $473 $780 Allocated payroll costs 74 279 198 Capital expenditures 244 470 382 15 The costs of achieving Year 2000 compliance, and of improving the Company's systems, are being funded through operating cash flow. With respect to embedded logic devices used to monitor or control equipment or facilities, the Company has completed a survey of all locations and identified 21 devices which must be modified or replaced. The Company expects to complete modification or replacement of these devices by the end of the third quarter of 1999 at an estimated aggregate cost of $0.3 million. Although the Company believes it has taken all of the necessary steps to ensure that the Company will be Year 2000 compliant, there can be no assurances that the Company will be able to complete all of the modifications in the required time frame, that all third parties will be Year 2000 compliant, or that unforeseen Year 2000 issues will not arise. Management currently believes the worst case scenario with any reasonable probability is that a small number of vendors, who are not critical to the operations of the Company's business, will be unable to supply materials for a short time after January 1, 2000, and that minor additional systems modifications not identified during evaluation or testing will be identified and corrected in a matter of days. The Company does not anticipate any disruption of service to its customers. The Company is currently preparing contingency plans for the various potential disruptions that could occur in spite of its own efforts and representations from its customers and suppliers. ABI has recorded what it believes are adequate provisions for environmental remediation and product-related liabilities, including provisions for testing for potential remediation of conditions at its own facilities. While ABI believes its estimate of the future amount of these liabilities is reasonable and that they will be paid over a period of five to ten years, the timing and amount of such payments may differ significantly from ABI's assumptions. Although the effect of future government regulation could have a significant effect on ABI's costs, ABI is not aware of any pending legislation which could significantly affect the liabilities ABI has established for these matters. There can be no assurances that the costs of any future government regulations could be passed along by ABI to its customers. Certain legal and administrative claims are pending or have been asserted against ABI, which are considered incidental to its business. Among these claims, ABI is a named party in several actions associated with waste disposal sites and asbestos-related claims. These actions include possible obligations to remove or mitigate the effects on the environment of wastes deposited at various sites, including Superfund sites. The exact amount of such future costs to ABI is indeterminable due to such unknown factors as the magnitude of cleanup costs, the timing and extent of the remedial actions that may be required, the determination of ABI's liability in proportion to other potentially responsible parties and the extent to which costs may be recoverable from insurance. ABI has recorded provisions in its financial statements for the 16 estimated probable loss associated with all known environmental and asbestos-related contingencies. The contingencies also include claims for personal injury and/or property damage. (See Note 10 of Notes to Consolidated Financial Statements.) Cash requirements for capital expenditures, working capital, debt service, equity investments in K&M and the current authorizations of $4.7 million to repurchase ABI common stock and $5.2 million to repurchase Congoleum common stock, are expected to be financed from operating activities and borrowings under existing lines of credit which are presently $65.0 million. Market Risk The Company is exposed to changes in prevailing market interest rates affecting the return on its investments but does not consider this interest rate market risk exposure to be material to its financial condition or results of operations. The Company invests primarily in highly liquid debt instruments with strong credit ratings and short-term (less than one year) maturities. The carrying amount of these investments approximates fair value due to the short-term maturities. Substantially all of the Company's outstanding long-term debt as of December 31, 1998 consisted of indebtedness with a fixed rate of interest which is not subject to change based upon changes in prevailing market interest rates. The Company operates internationally, principally in Canada, Europe and the Far East, giving rise to exposure to market risks from changes in foreign exchange rates. To a certain extent, foreign currency exchange rate movements also affect the Company's competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors. For foreign currency exposures existing at December 31, 1998, a 10% unfavorable movement in currency exchange rates in the near term would not materially affect ABI's consolidated operating results, financial position or cash flows. Under its current policies, the Company does not use derivative financial instruments, derivative commodity instruments or other financial instruments to manage its exposure to changes in interest rates, foreign currency exchange rates, commodity prices or equity prices. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 7, page 17, for disclosures about market risk. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements required under this item are incorporated herein by reference to pages 20 through 65 of this Form 10-K. The consolidated financial statement schedule required under this item is incorporated herein by reference to page 66 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is contained in ABI's Proxy Statement for its Annual Stockholders' Meeting to be held May 5, 1999 filed with the Securities and Exchange Commission within 120 days after December 31, 1998 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is contained in ABI's Proxy Statement for its Annual Stockholders' Meeting to be held May 5, 1999 filed with the Securities and Exchange Commission within 120 days after December 31, 1998 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is contained in ABI's Proxy Statement for its Annual Stockholders' Meeting to be held May 5, 1999 filed with the Securities and Exchange Commission within 120 days after December 31, 1998 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is contained in ABI's Proxy Statement for its Annual Stockholders' Meeting to be held May 5, 1999 filed with the Securities and Exchange Commission within 120 days after December 31, 1998 and is incorporated herein by reference. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of Financial Statements and Financial Statement Schedules (1) The following consolidated financial statements of American Biltrite Inc. and subsidiaries are included in Item 8: Report of Independent Auditors Consolidated balance sheets - December 31, 1998 and 1997 Consolidated statements of earnings - Years ended December 31, 1998, 1997 and 1996 Consolidated statements of stockholders' equity Years ended December 31, 1998, 1997 and 1996 Consolidated statements of cash flows Years ended December 31, 1998, 1997 and 1996 Notes to consolidated financial statements (2) The following financial statement schedule is included in Item 14 (d) SCHEDULE II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) Listing of Exhibits The listing of exhibits required under this item is incorporated herein by reference to pages 68 through 71 of this Form 10-K. (b) Reports on Form 8-K. None. (c) Exhibits: The required exhibits are filed herewith following the required Exhibit Index. (d) Financial Statement Schedule: The required consolidated financial statement schedule is included on page 66 of this Form 10-K. 19 Report of Ernst & Young LLP, Independent Auditors Board of Directors and Stockholders American Biltrite Inc. We have audited the accompanying consolidated balance sheets of American Biltrite Inc. and subsidiaries (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Biltrite Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Boston, Massachusetts March 8, 1999 20 American Biltrite Inc. and Subsidiaries Consolidated Balance Sheets (In thousands of dollars) December 31 1998 1997 ------------------------- Assets Current assets: Cash and cash equivalents $ 59,505 $ 19,306 Short-term investments - 7,900 Accounts and notes receivable, less allowances of $5,124 in 1998 and $5,052 in 1997 for doubtful accounts and discounts 33,551 30,254 Inventories 69,722 74,355 Prepaid expenses and other current assets 9,199 9,187 ------------------------- Total current assets 171,977 141,002 Other assets: Goodwill, net 22,332 23,421 Deferred income taxes 1,863 2,636 Other assets 16,097 12,171 ------------------------- 40,292 38,228 Property, plant and equipment, net 123,770 120,456 ------------------------- Total assets $336,039 $299,686 ========================= Liabilities and stockholders' equity Current liabilities: Notes payable to banks $ 5,500 Accounts payable $ 20,596 19,060 Accrued expenses 50,328 47,769 Current portion of long-term debt 4,305 1,156 ------------------------- Total current liabilities 75,229 73,485 Long-term debt, less current portion 114,101 93,253 Other liabilities 56,039 51,271 Noncontrolling interests 19,433 16,332 Stockholders' equity: Common stock, par value $.01--authorized 15,000,000 shares, issued 4,607,902 shares 46 46 Additional paid-in capital 19,423 19,423 Retained earnings 68,247 60,924 Accumulated other comprehensive income (4,906) (3,305) ------------------------- 82,810 77,088 Less cost of shares of common stock in treasury (960,914 shares in 1998 and 971,394 shares in 1997) 11,573 11,743 ------------------------- Total stockholders' equity 71,237 65,345 ------------------------- Total liabilities and stockholders' equity $336,039 $299,686 ========================= See accompanying notes. 21 American Biltrite Inc. and Subsidiaries Consolidated Statements of Earnings (In thousands of dollars, except per share data)
Year ended December 31 1998 1997 1996 ------------------------------------------------------ Revenues: Net sales $423,879 $417,512 $417,961 Interest 1,790 1,626 1,807 Other 1,882 1,078 2,422 --------------------------------------------------- 427,551 420,216 422,190 Costs and expenses: Cost of products sold 290,507 289,739 286,370 Selling, general and administrative expenses 102,999 101,838 103,099 Interest 9,043 9,344 10,747 --------------------------------------------------- 402,549 400,921 400,216 --------------------------------------------------- Earnings before income taxes and other items 25,002 19,295 21,974 Provision for income taxes 9,681 7,373 8,871 --------------------------------------------------- 15,321 11,922 13,103 Noncontrolling interests (5,145) (3,777) (6,804) --------------------------------------------------- Earnings before extraordinary item 10,176 8,145 6,299 Extraordinary item--early retirement of debt, net of income tax benefit (1,174) - - --------------------------------------------------- Net earnings $ 9,002 $ 8,145 $ 6,299 =================================================== Earnings per share: Basic Earnings before extraordinary item $ 2.79 $ 2.24 $ 1.73 Extraordinary item (.32) - - --------------------------------------------------- Net income $ 2.47 $ 2.24 $ 1.73 =================================================== Diluted Earnings before extraordinary item $ 2.67 $ 2.18 $ 1.69 Extraordinary item (.31) - - =================================================== Net income $ 2.36 $ 2.18 $ 1.69 ===================================================
See accompanying notes. 22 American Biltrite Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (In thousands of dollars)
Accumulated Additional Other Total Common Paid-in Retained Comprehensive Treasury Stockholders' Stock Capital Earnings Income Stock Equity ------------------------------------------------------------------------------------ Balance at December 31, 1995 $19,469 $52,096 $(2,779) $(10,990) $57,796 Comprehensive income: Net earnings for 1996 6,299 6,299 Other comprehensive income (19) (19) ---------- Total comprehensive income 6,280 Dividends declared ($.40 per share) (1,458) (1,458) Effects of Congoleum capital transactions (17) (17) Change in par value $46 (46) Exercise of stock options 39 39 Purchase of treasury stock (879) (879) ------------------------------------------------------------------------------------ Balance at December 31, 1996 46 19,423 56,920 (2,798) (11,830) 61,761 Comprehensive income: Net earnings for 1997 8,145 8,145 Other comprehensive income (507) (507) ---------- Total comprehensive income 7,638 Dividends declared ($.40 per share) (1,453) (1,453) Effects of Congoleum capital transactions (2,688) (2,688) Exercise of stock options 89 89 Purchase of treasury stock (2) (2) ------------------------------------------------------------------------------------ Balance at December 31, 1997 46 19,423 60,924 (3,305) (11,743) 65,345 Comprehensive income: Net earnings for 1998 9,002 9,002 Other comprehensive income (1,601) (1,601) ---------- Total comprehensive income 7,401 Dividends declared ($.45 per share) (1,639) (1,639) Effects of Congoleum capital transactions (40) (40) Exercise of stock options 171 171 Purchase of treasury stock (1) (1) ------------------------------------------------------------------------------------ Balance at December 31, 1998 $46 $19,423 $68,247 $(4,906) $(11,573) $71,237 ====================================================================================
See accompanying notes. 23 American Biltrite Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands of dollars)
Year ended December 31 1998 1997 1996 ----------------------------------------- Operating activities Net earnings $ 9,002 $ 8,145 $ 6,299 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,128 14,501 13,874 Provision for doubtful accounts 2,411 2,433 2,885 Loss on early retirement of debt, including write off of deferred financing fees 3,809 - - Deferred income taxes 5,144 (470) 1,934 Accounts and notes receivable (5,769) 1,718 (7,197) Inventories 4,407 5,830 1,495 Prepaid expenses and other current assets (2,518) (816) 1,733 Accounts payable and accrued expenses 2,342 (9,623) 2,315 Noncontrolling interests 5,145 3,777 6,804 Other 188 (53) (1,165) ----------------------------------------- Net cash provided by operating activities 39,289 25,442 28,977 Investing activities Purchases of short-term investments (15,000) (40,200) (45,000) Proceeds from sales of short-term investments 22,900 49,800 27,500 Investments in property, plant and equipment (17,155) (22,183) (19,869) Business acquisitions, net of cash acquired - - (1,680) ----------------------------------------- Net cash used in investing activities (9,255) (12,583) (39,049) Financing activities Long-term borrowings 101,719 - 15,000 Payments on long-term debt (77,787) (12,312) (19,457) Net short-term (payments) borrowings (5,500) (4,750) 10,250 Debt issuance costs (3,310) - - Premium payment on early retirement of debt (2,563) - - Purchase and retirement of Congoleum Class B shares - (5,630) - Purchase of treasury shares (191) (3,896) (879) Other (1,468) (1,338) (1,419) ----------------------------------------- Net cash provided (used) by financing activities 10,900 (27,926) 3,495 Effect of foreign exchange rate changes on cash (735) 715 938 ----------------------------------------- Increase (decrease) in cash and cash equivalents 40,199 (14,352) (5,639) Cash and cash equivalents at beginning of year 19,306 33,658 39,297 ----------------------------------------- Cash and cash equivalents at end of year $ 59,505 $ 19,306 $ 33,658 =========================================
See accompanying notes. 24 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1998 1. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of American Biltrite Inc. and its wholly-owned subsidiaries (referred to as ABI or the Company), as well as entities over which it has voting control, including Congoleum Corporation, a publicly traded company in which ABI at December 31, 1998 has a 49% ownership interest and 64% of the voting shares. Intercompany accounts and transactions, including transactions with associated companies which result in intercompany profit, are eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Some of the information presented in this report constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Cash Equivalents Cash equivalents represent highly liquid debt instruments with maturities of three months or less at the date of purchase. The carrying value of cash equivalents approximates fair value. Short-Term Investments Investments in A1/P1 commercial paper with a maturity greater than three months, but less than six months, at the time of purchase are considered to be short-term investments. The carrying amount of the commercial paper approximates fair value due to its short maturity. 25 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Significant Accounting Policies (continued) Inventories Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for most of the Company's domestic inventories and the first-in, first-out (FIFO) method for the Company's foreign inventories. Property, Plant and Equipment These assets are stated at cost. Expenditures for maintenance, repairs and renewals are charged to expense; major improvements are capitalized. Depreciation, which is determined using the straight-line method, is provided over the estimated useful lives (30 to 40 years for buildings and building improvements, 10 to 15 years for production equipment and heavy-duty vehicles, and three to 10 years for light-duty vehicles and office furnishings and equipment). Debt Issue Costs Costs incurred in connection with the issuance of long-term debt have been capitalized and are being amortized over the life of the related debt agreements. During 1998, Congoleum wrote off old debt issue costs and capitalized new debt issue costs in connection with a debt offering and redemption (see Note 6). Debt issue costs at December 31, 1998 and 1997 amounted to $3,170,000 and $1,547,000, respectively, net of accumulated amortization of $140,000 and $2,603,000, respectively, and are included in other noncurrent assets. Goodwill The excess of purchase cost over the fair value of the net assets acquired (goodwill) established in 1993 by Congoleum is being amortized on a straight-line basis over 40 years. Goodwill associated with the K & M transactions (see Note 4) is being amortized over 20 years. At each balance sheet date, the Company evaluates the recoverability of its goodwill using certain financial indicators, such as historical and future ability to generate income from operations. Accumulated amortization amounted to $7,572,000 and $6,483,000 at December 31, 1998 and 1997, respectively. 26 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Significant Accounting Policies (continued) Impairment of Long-Lived Assets In the event that facts and circumstances indicate the Company's assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to fair market value is required. Environmental Remediation Liabilities Effective January 1, 1997, the Company adopted the American Institute of Certified Public Accountants' (AICPA) Statement of Position (SOP) 96-1, Environmental Remediation Liabilities. The Company is subject to federal, state and local environmental laws and regulations. The Company records a liability for environmental remediation claims when a clean-up program or claim payment becomes probable and the costs can be reasonably estimated. The recorded liabilities are not discounted for delays in future payments (see Notes 5, 7 and 10). Revenue Recognition The Company records revenue, net of a provision for estimated returns and allowances, upon shipment. Income Taxes The Company provides for income taxes based upon earnings reported for financial statement purposes. Deferred tax assets and liabilities are determined based upon temporary differences between the financial reporting and tax bases of assets and liabilities. 27 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Significant Accounting Policies (continued) Stock-Based Compensation Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the recognition of, or disclosure of, compensation expense for grants of stock options or other equity instruments issued to employees based on their fair value at the date of grant. As permitted by SFAS No. 123, the Company elected the disclosure requirements instead of recognition of compensation expense and therefore will continue to apply existing accounting rules under APB Opinion No. 25 (APB 25) and related interpretations for its employee stock options. Under APB 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Research and Development Costs Expenditures relating to the development of new products are charged to operations as incurred and amounted to $5,175,000, $5,388,000 and $5,513,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Foreign Currency Translation All balance sheet accounts of foreign subsidiaries are translated at the current exchange rate, and income statement items are translated at the average exchange rate for the period; resulting translation adjustments are made directly to accumulated other comprehensive income in stockholders' equity. Realized exchange gains and losses (immaterial in amount) are included in current operations. Issuances of Stock by Subsidiaries The Company accounts for issuances of stock by its subsidiaries as capital transactions. 28 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Significant Accounting Policies (continued) Earnings Per Share Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings Per Share. Under SFAS No. 128, primary and fully diluted earnings per share are replaced by basic and diluted earnings per share. Basic earnings per share have been computed based on the weighted-average number of common shares outstanding during the period. Diluted earnings per share have been computed based upon the weighted-average number of common shares outstanding during the year, adjusted for the dilutive effect of shares issuable upon the exercise of stock options determined based upon average market price for the period. Reclassifications For comparative purposes certain prior years' amounts have been reclassified to conform to the current year presentation. Changes in Accounting Principles During 1998, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This Statement requires certain costs of internally developed software to be capitalized for years beginning after December 15, 1998. The Company will adopt SOP 98-1 effective January 1, 1999. The adoption of this SOP would not have had a material impact in 1998. 29 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Inventories Inventory at December 31 consisted of the following: 1998 1997 ------------------------ (In thousands) Finished goods $ 50,683 $ 53,139 Work-in-process 9,201 9,422 Raw materials and supplies 9,838 11,794 ------------------------ $ 69,722 $ 74,355 ======================== At December 31, 1998, domestic inventories determined by the LIFO inventory method amounted to $53,065,000 ($54,713,000 at December 31, 1997). If the FIFO inventory method, which approximates replacement cost, had been used for these inventories, they would have been $181,000 and $1,224,000 greater at December 31, 1998 and 1997, respectively. 3. Property, Plant and Equipment A summary of the major components of property, plant and equipment at December 31 is as follows: 1998 1997 ------------------------ (In thousands) Land and improvements $ 5,402 $ 5,411 Buildings 55,706 50,281 Machinery and equipment 186,741 177,997 Construction-in-progress 5,646 4,643 ------------------------ 253,495 238,332 Less accumulated depreciation 129,725 117,876 ------------------------ $123,770 $120,456 ======================== 30 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Property, Plant and Equipment (continued) Interest is capitalized in connection with the construction of major facilities. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. Capitalized interest cost was $325,000 and $823,000 for 1998 and 1997, respectively. Depreciation expense amounted to $13,599,000, $12,600,000 and $12,151,000 in 1998, 1997 and 1996, respectively. 4. Related-Party Transactions Included in other assets on the accompanying balance sheets is ABI's investment in Compania Hulera Sula, S.A., a 50%-owned associate. The investment is accounted for on the cost method due to the uncertainty of the political climate and currency restrictions in Honduras. During 1997, the Company wrote down its investment from $1,100,000 to $850,000 to reflect a reduction in Hulera Sula's net worth. Congoleum Transactions In November 1998, Congoleum's Board of Directors authorized Congoleum to repurchase an additional $5,000,000 of its common stock (Class A and Class B shares) through the open market or through privately negotiated transactions, bringing the total authorized common share repurchases to $15,000,000. Under the total plan, Congoleum has repurchased $9,763,000 of common stock through December 31, 1998. Shares of Class B stock repurchased (totaling 595,000) have been retired. The reduction of Congoleum's equity from the repurchase of common stock during 1998 and 1997 resulted in a reduction of ABI's investment in Congoleum of $2,728,000, which was charged to retained earnings. The effect of the repurchase of Congoleum's common stock was to increase ABI's ownership interest from 44% to 49%. In addition, as of December 31, 1998, ABI's ownership of 4,395,605 shares of Congoleum's Class B common stock represented 64% of the voting control of Congoleum. ABI has had voting control of Congoleum since 1995, and accordingly, the accounts of Congoleum are consolidated into the financial statements of the Company. 31 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Related-Party Transactions (continued) K&M Transactions During 1995, ABI acquired additional partnership interests in K&M, giving ABI majority ownership and control. In conjunction with the acquisition, ABI also entered into agreements with the remaining limited partners of K&M, providing ABI the option to buy, and providing the limited partners of K&M the option to sell, the remaining partnership interests in K&M. During 1996, ABI acquired an additional limited partnership interest of 11% for consideration of $1,939,000. If all of the remaining limited partnership interests in K&M were to be purchased by ABI, the purchase price would amount to approximately $2,958,000 as of December 31, 1998. ABI owns an 82% partnership interest in K&M at December 31, 1998. 5. Accrued Expenses Accrued expenses at December 31 consisted of the following: 1998 1997 ------------------------ (In thousands) Accrued advertising and sales promotions $22,804 $21,215 Employee compensation and related benefits 11,225 9,880 Interest 3,836 3,223 Environmental liabilities 3,690 3,535 Income taxes 4,739 5,130 Other 4,034 4,786 ------------------------ $50,328 $47,769 ======================== 32 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Financing Arrangements Long-term debt at December 31 consisted of the following: 1998 1997 ------------------------ (In thousands) 8 5/8% Senior Notes, due 2008 $ 99,526 9% Senior Notes, due 2001 - $76,594 Series A Notes 15,000 15,000 Other notes 3,880 2,815 ------------------------ 118,406 94,409 Less current portion 4,305 1,156 ------------------------ $114,101 $93,253 ======================== In August 1998, Congoleum issued $100,000,000 face amount of 8 5/8% Senior Notes, maturing August 1, 2008, priced at 99.505 to yield 8.70%. The Senior Notes are redeemable at the option of Congoleum, in whole or in part, at any time on or after August 1, 2003 at a predetermined redemption price (ranging from 104% to 100%), plus accrued and unpaid interest to the date of redemption. The indenture under which the notes were issued includes certain restrictions on additional indebtedness and uses of cash by Congoleum, including dividend payments. The holders of the Senior Notes have no recourse to the assets of ABI and K&M. Proceeds from the 8 5/8% Senior Notes were used to redeem all of the previously outstanding 9% Senior Notes, including accrued interest and prepayment premium, to pay certain fees and expenses in connection with the offering, and for working capital purposes. In connection with the offering, Congoleum recorded an extraordinary charge of $2,413,000, net of $1,400,000 of income tax benefit, to write off debt issuance costs and premiums associated with the repurchase of the 9% Senior Notes. ABI recorded its share of this extraordinary charge in the amount of $1,174,000. 33 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Financing Arrangements (continued) During 1997 and 1996, Congoleum repurchased $11,156,000 and $2,250,000, respectively, of the 9% Senior Notes. In connection with the repurchases in 1997, Congoleum recorded an extraordinary charge of $279,000, net of $160,000 of income tax benefit, to write off the portion of the debt issuance costs and premiums associated with the repurchased Senior Notes. Such charges were immaterial to the financial statements for 1996. The fair value of Congoleum's long-term debt is based on the quoted market prices for publicly traded issues. The estimated fair value of the 8 5/8% Senior Notes was $98,500,000 at December 31, 1998. The estimated fair value of the 9% Senior Notes was $77,743,000 at December 31, 1997. In January 1996, ABI entered into a credit agreement with an insurance company (the Agreement) providing for the issuance of senior promissory notes aggregating $30 million. In January 1996, $15 million principal amount of notes were issued (Series A Notes). The Series A Notes bear interest at 6.7% per annum and are payable in annual installments of $3 million beginning in 1999. Notes issued under the Agreement are obligations of ABI, and the holders of the Notes have no recourse to the assets of Congoleum or K&M. The fair value of the Series A Notes approximates their carrying value at both December 31, 1998 and 1997. Other notes consist of promissory notes issued in connection with various transactions. In 1998, the Company obtained loans from local banks in connection with the acquisition of buildings in Belgium and Singapore. The loans were for 2,500,000 Belgian francs and 2,700,000 Singapore dollars. The loans are payable in equal installments through 2008 and 2018, respectively. The interest rates on the loans are 5.6% for the Belgian loan and 1.5% above the local bank's prime rate (7.5% at December 31, 1998) for the Singapore loan. The loans are secured by the property acquired. Other notes also include promissory notes issued in connection with the K&M transactions (described in Note 4), which bear interest at 1% above BankBoston's base lending rate (7.75% at December 31, 1998), and are repayable through 1999. 34 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Financing Arrangements (continued) At December 31, 1998, the Company had revolving and other short-term agreements providing for secured and unsecured borrowings up to $65 million, with interest accruing at variable rates. No borrowings were outstanding under these agreements at December 31, 1998. At December 31, 1997, the weighted-average interest rate on the $5.5 million outstanding under these arrangements, which was unsecured, was approximately 7.4%. The carrying value of amounts outstanding under these agreements at December 31, 1997 approximated fair value. Commitment fees and compensating balance requirements associated with these agreements are insignificant. The terms of the Company's loan agreements impose certain restrictions on its ability to incur additional indebtedness and call for the maintenance of specific levels of working capital and minimum net worth and restrict the payment of cash dividends to holders of common stock and other capital distributions as defined. At December 31, 1998, retained earnings which were unrestricted as to such distributions amounted to $6,156,000. Interest paid on all outstanding debt amounted to $9,480,000 in 1998, $10,216,000 in 1997 and $10,825,000 in 1996. Principal payments on the Company's long-term obligations due in each of the next five years are as follows (in thousands): 1999 $4,305 2000 3,110 2001 3,113 2002 3,117 2003 3,120 35 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Other Liabilities Other liabilities at December 31 consisted of the following: 1998 1997 ------------------------ (In thousands) Pension benefits $14,531 $13,248 Other postretirement benefits 9,872 9,958 Environmental remediation and product-related liabilities 16,198 13,981 Accrued workers' compensation 4,987 4,425 Deferred income taxes 6,658 4,404 Accrued compensation 1,061 961 Other 2,732 4,294 ------------------------ $56,039 $51,271 ======================== 36 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Pension Plans The Company sponsors several noncontributory defined benefit pension plans covering substantially all employees. Amounts funded annually by the Company are actuarially determined using the projected unit credit and unit credit methods and are equal to or exceed the minimum required by government regulations. Pension fund assets are invested in a variety of equity and fixed-income securities. Net periodic pension cost includes the following components: Year ended December 31 1998 1997 1996 ------------------------------ (In thousands) Service cost $ 1,609 $ 1,535 $ 1,495 Interest cost 4,871 4,809 4,706 Expected return on assets (5,384) (4,809) (4,603) Amortization of prior service benefit (229) (240) (230) Amortization of transition obligation 277 274 272 Recognized net actuarial (gains) losses (221) 103 10 ------------------------------ Net periodic benefit cost $ 923 $ 1,672 $ 1,650 ============================= The weighted-average assumptions as of December 31 were: 1998 1997 ---------------------------- Discount rate 6.75%-7.50% 7.00%-7.50% Expected return on plan assets 7.50%-9.00% 7.50%-9.00% Rate of compensation increase 5.00% 5.00%-5.50% 37 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Pension Plans (continued) The following table sets forth the components of the change in projected benefit obligation and fair value of plan assets during 1998 and 1997: 1998 1997 ------------------------ (In thousands) Change in benefit obligation Benefit obligation at beginning of year $71,956 $70,097 Service cost 1,609 1,535 Interest cost 4,871 4,809 Plan participants' contributions 111 111 Plan amendments - 29 Actuarial losses 2,018 1,078 Foreign currency exchange rate changes (79) (252) Benefits paid (5,446) (5,451) ------------------------ Benefit obligation at end of year $75,040 $71,956 ======================== Change in plan assets Fair value of plan assets at beginning of year $64,230 $56,432 Actual return on plan assets 4,794 10,143 Company contributions 1,749 3,017 Plan participants' contributions 111 111 Foreign currency exchange rate changes (511) (22) Benefits paid (5,446) (5,451) ------------------------ Fair value of plan assets at end of year $64,927 $64,230 ======================== 38 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Pension Plans (continued) The funded status of the plans at December 31 were as follows: 1998 1997 ------------------------- (In thousands) Funded status of the plan (underfunded) $(10,114) $ (7,900) Unrecognized net actuarial losses (gains) 788 (2,013) Unrecognized transition obligation 525 775 Unamortized prior service benefit (1,702) (2,192) ------------------------- Net amount recognized $(10,503) $(11,330) ========================= The amounts recorded in the statement of financial position as of December 31 were: 1998 1997 ------------------------- (In thousands) Accrued benefit liability $(14,923) $(13,967) Intangible asset 796 870 Deferred tax asset 1,322 645 Accumulated other comprehensive loss 2,302 1,122 ------------------------- Net amount recognized $(10,503) $(11,330) ========================= As of December 31, 1998 and 1997, the Company had pension plans with projected benefit obligations which exceeded plan assets. For such plans, the aggregated projected benefit obligations were $60,352,000 and $26,758,000 for 1998 and 1997, respectively, and the aggregated plan assets were $46,926,000 and $15,069,000, respectively. The Company also has three 401(k) defined contribution retirement plans that cover substantially all employees. Eligible employees may contribute 12% to 15% of compensation with partially matching Company contributions. Defined contribution pension expense for the Company was $1,779,000, $1,579,000 and $2,043,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 39 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Postretirement Benefits Other than Pensions Net periodic postretirement benefits cost for the year ended December 31 is as follows: 1998 1997 1996 ---------------------------- (In thousands) Service cost $ 139 $ 139 $ 141 Interest cost 480 505 484 Amortization of prior service benefit (409) (409) (447) Amortization of net loss 60 99 90 ---------------------------- Net periodic benefit cost $ 270 $ 334 $ 268 ============================ Weighted-average discount rate 6.75% 7.0% 7.0% The change in benefit obligation and the actuarial and recorded liabilities for these postretirement benefits at December 31, none of which has been funded in 1998 and 1997, were as follows: 1998 1997 ---------------------- (In thousands) Change in benefit obligation: Benefit obligation at end of prior year $ 7,552 $ 7,490 Service cost (with interest) 139 139 Interest cost 480 505 Actuarial (gain) loss (256) 16 Benefits paid (539) (598) ---------------------- Benefit obligation at end of year $ 7,376 $ 7,552 ====================== Funded status (unfunded) $ (7,376) $ (7,552) Unrecognized net (gain) loss (96) 220 Unrecognized prior service benefit (2,815) (3,224) ---------------------- Accrued postretirement benefit cost (10,287) (10,556) Less current portion 415 598 ---------------------- Noncurrent postretirement benefit obligations $ (9,872) $ (9,958) ====================== 40 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Postretirement Benefits Other than Pensions (continued) The annual rate of increase in the per capita cost of covered health care benefits was assumed to be 8.1% in 1998; the rate was assumed to decrease gradually to 5.0% over the next eight years and remain level thereafter. An increase of one percentage point in the assumed health care cost trend rates for each future year would increase the aggregate of the service and interest cost components of net periodic postretirement benefits cost by $53,000 for the year ended December 31, 1998 and would increase the accumulated postretirement benefit obligations by $605,000 at December 31, 1998. 10. Commitments and Contingencies Leases The Company occupies certain warehouse and office space and uses certain equipment and motor vehicles under lease agreements expiring at various dates through 2004. The leases generally require the Company to pay for utilities, insurance, taxes and maintenance, and some contain renewal options. Total rent expense charged to operations was $3,889,000 in 1998, $3,428,000 in 1997 and $3,179,000 in 1996. Future minimum payments relating to operating leases are as follows (in thousands): 1999 $3,082 2000 2,255 2001 1,249 2002 729 2003 590 Thereafter 40 ------------ Total future minimum lease payments $7,945 ============ 41 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Commitments and Contingencies (continued) Environmental and Other Liabilities The Company records a liability for environmental remediation claims when a clean-up program or claim payments become probable and the costs can be reasonably estimated. As assessments and clean-up programs progress, these liabilities are adjusted based upon the progress in determining the timing and extent of remedial actions and the related costs and damages. The recorded liabilities are not reduced by the amount of insurance recoveries. Such estimated insurance recoveries are reflected in other noncurrent assets and are considered probable of recovery. American Biltrite Inc. ABI is a codefendant with many other manufacturers and distributors of asbestos-containing products in approximately seventy-nine pending claims involving approximately 590 individuals as of December 31, 1998. These claims allege personal injury from exposure to asbestos or asbestos-containing products. As of December 31, 1997, there were approximately sixty-six pending claims involving approximately 577 individuals. Activity related to asbestos claims during the years ended December 31, 1998 and 1997 was as follows: 1998 1997 ------------------------ Claims at January 1 66 64 New claims 31 16 Settlements (3) (3) Dismissals (15) (11) ------------------------ Claims at December 31 79 66 ======================== 42 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Commitments and Contingencies (continued) The total indemnity costs incurred to settle claims during 1998 and 1997 were $265,000 and $510,000, respectively, all of which were paid by ABI's insurance carriers, as were the related defense costs. The average indemnity cost per resolved claim was $15,000 in 1998 and $36,000 in 1997. Furthermore, under certain circumstances, third parties are contractually liable for up to the full amount of any liabilities suffered by ABI in connection with these claims. In general, asbestos-containing products have not been found to pose a health risk unless significant amounts of free asbestos fibers become airborne. The asbestos in asbestos-containing products sold by ABI was encapsulated during the manufacturing process. ABI believes that these suits are without merit and that, in any event, the damages sought are substantially within the coverages of its applicable liability insurance policies, and accordingly, no dedicated reserves have been set aside for these suits. ABI has been named as a Potentially Responsible Party ("PRP") within the meaning of the Federal Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), as to two sites in two separate states. At one of the two sites located in Southington, Connecticut, ("Southington Site"), ABI's subsidiary ("Ideal") is also named as a PRP. At the Southington Site, the currently estimated aggregate future cost of remediation and monitoring is approximately $28 million. ABI's and Ideal's share of the assessments to the PRPs to date is approximately $115,000. Subject to a final allocation among the PRPs, ABI's and Ideal's share of the future remediation costs is currently estimated to be approximately $340,000. Under an agreement, Ideal will share a percentage of this cost with the former owner of Ideal's assets. Under an agreement between ABI and The Biltrite Corporation ("TBC"), TBC is liable for 37.5% of the costs incurred by ABI with respect to the Southington Site. 43 10. Commitments and Contingencies (continued) At the other site, ABI, together with 26 other PRPs, signed a consent decree and site remediation agreement which, without an admission of liability, requires remediation at the ILCO Superfund site located in Leeds, Alabama (the "ILCO Site"). On April 22, 1997, the United States District Court for the Northern District of Alabama approved the consent decree. The currently estimated aggregate future cost of remediation at the ILCO Site is $34.3 million. Pursuant to a final allocation among consent decree participants, ABI's share of the currently estimated remediation cost is approximately $1.0 million after considering commitments from de minimus settlors, the City of Leeds, one of the City of Leeds insurers and TBC, which is, by agreement, liable for 37.5% of the remediation costs incurred by ABI. ABI has paid approximately $85,000 of this amount, with the rest payable over the next four to seven years. ABI has asserted a claim for a portion of the allocation share attributable to ABI against a third party who the Company believes arranged for the shipment of the alleged hazardous substances generated by ABI to the ILCO site. ABI and the other settling PRPs also are pursuing litigation against PRPs who used the ILCO Site and have not settled. In addition, ABI has been named as a defendant in two environmental lawsuits. In one case, ABI is alleged to have sent hazardous waste to a municipal landfill in New Hampshire. The past and future costs to clean up the site are expected to be approximately $24 million. ABI does not have nor has it been furnished any information by any party to the litigation to estimate what its potential liability would be at this site. However, in order to avoid the cost of litigation, ABI has offered to contribute $173,000 as part of $2.8 million being raised by fourteen third-party defendants to reach a global settlement of the case. The global settlement has not yet been, and there can be no assurance that it will be, agreed or concluded. One of ABI's insurance carriers has agreed to contribute one-half of ABI's share of this global settlement. Furthermore under an agreement between ABI and TBC, TBC is liable for 37.5% of the costs incurred by ABI. 44 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Commitments and Contingencies (continued) In the other environmental lawsuit, ABI currently is a defendant in which Olin Corporation, the present owner of a former chemical plant in Wilmington, Massachusetts, claims that ABI and other defendants are liable for a portion of the costs associated with remediating environmental conditions at the site. ABI believes that its exposure to liability in this lawsuit may be material. The lawsuit, captioned Olin Corporation v. Fisons, plc et al., was filed on May 26, 1993 in the Federal District Court of Massachusetts. A wholly owned subsidiary of ABI owned and operated the Wilmington plant from 1959 to 1964 and, for approximately one month during 1964, ABI held title to the property directly. ABI may be liable for the activities of that subsidiary corporation from 1953 to 1964. Past plant operations from 1953 to 1986 have caused surface and groundwater contamination at and near the site. Since 1989, Olin has conducted an environmental assessment of the site and awaits a decision by Massachusetts officials concerning the scope of any remedial actions which must be undertaken at the site. Olin claims to have spent more than $23 million in investigative and other response costs to date. While additional expenditures are anticipated, because Massachusetts officials have not yet determined what the remedy for the site will be, ABI is unable to determine the amount of additional expenditures which may be required at the site. Also, because the matter currently is subject to litigation, ABI is unable to express an opinion as to what portion of the costs incurred at the site ABI may be required to pay. Management continues to defend against this lawsuit vigorously. Under an agreement between ABI and TBC, TBC is liable for 37.5% of the costs that may be incurred by ABI as a result of this lawsuit. ABI also is potentially responsible for response and remediation costs as to four state-supervised sites, two sites in Massachusetts, and one each in New York and New Jersey. At these four sites, ABI's liability will be based upon disposal of allegedly hazardous waste material from its current and former plants. While the exact amount of the future costs to ABI resulting from its liability is indeterminable due to such unknown factors as the magnitude of clean-up costs, the timing and extent of the remedial actions that may be required, determination of ABI's liability in proportion to other responsible parties and the extent to which costs may be recoverable from insurance, ABI believes, based upon current information available, that its liability at any of these sites will not be material. Under an agreement between ABI and TBC, TBC is liable for 37.5% of the costs which may be incurred by ABI at all of these sites. 45 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Commitments and Contingencies (continued) ABI has made demands against its insurance carriers to provide defense and indemnity for ABI's liabilities at the Southington site, the ILCO site, the New Hampshire municipal landfill for that portion of the settlement not covered by the agreement with one of ABI's insurance carriers, the Olin site and the state-supervised sites in Massachusetts, New York and New Jersey. ABI and its principal carrier have entered into negotiations to resolve this insurance coverage demand made against the carrier. ABI cannot estimate the probable insurance recovery from this carrier or any of its other insurance carriers at any of the sites at this stage of negotiations. ABI is involved in other routine legal proceedings relating to its business and operations. ABI does not believe that these proceedings, in the aggregate, will have a material adverse effect on ABI's results of operations or financial condition. As of December 31, 1998, the Company has accrued $1.2 million for ABI's estimable and probable amounts for contingencies described above. Additional amounts have been provided for matters related to Congoleum as described below. Congoleum Corporation Congoleum is named, together with a large number (in most cases, hundreds) of other companies, as a PRP in pending proceedings under the CERCLA, as amended, and similar state laws. In two instances, although not named as a PRP, Congoleum has received a request for information. These pending proceedings currently relate to seven disposal sites in New Jersey, Pennsylvania, Maryland, Connecticut and Delaware in which recovery from generators of hazardous substances is sought for the cost of cleaning up the contaminated waste sites. Congoleum's ultimate liability in connection with those sites may depend on many factors, including the volume of material contributed to the site, the number of other PRPs and their financial viability, the remediation methods and technology to be used, and the extent to which costs may be recoverable from insurance. However, under CERCLA and certain other laws, as a PRP, Congoleum can be held jointly and severally liable for all environmental costs associated with a site. 46 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Commitments and Contingencies (continued) The most significant exposure to which Congoleum has been named a PRP relates to a recycling facility site in Elkton, Maryland. Two removal actions are substantially complete as of December 31, 1998; however, the groundwater remediation phase has not begun and the remedial investigation/feasibility study related to the groundwater remediation has not been approved. The PRP group estimated that future costs of groundwater remediation would be approximately $26 million, of which, based on waste allocations among members of the PRP group, Congoleum's share was estimated to be approximately 5.5%. At December 31, 1998, Congoleum believes its probable liability, which has been recorded in other liabilities, based on present facts and circumstances, to be approximately $2 million. A corresponding insurance receivable of $1.5 million has been recorded in other noncurrent assets. No other PRP sites are material on an individual basis. Congoleum also accrues remediation costs for certain of Congoleum's owned facilities on an undiscounted basis. Estimated total clean-up costs, including capital outlays and future maintenance costs for soil and groundwater remediation, are primarily based on engineering studies. Although there can be no assurances, Congoleum anticipates that these matters will be resolved over a period of years for amounts (including legal fees and other defense costs) that Congoleum believes based on current estimates of liability and, in part, on insurance coverage, and based on advice from counsel, will not have a material adverse effect on the financial position of Congoleum. 47 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Commitments and Contingencies (continued) Congoleum is one of many defendants in approximately 657 pending claims (including workers' compensation cases), involving approximately 1,984 individuals as of December 31, 1998, alleging personal injury from exposure to asbestos or asbestos-containing products. There were 654 claims at December 31, 1997 which involved approximately 6,455 individuals. Activity related to asbestos claims during the years ended December 31, 1998 and 1997 was as follows: 1998 1997 ------------------------ Claims at January 1 654 661 New claims 203 126 Settlements (63) (44) Dismissals (137) (89) ------------------------ Claims at December 31 657 654 ======================== The total indemnity costs incurred, excluding the case noted below, to settle claims during 1998 and 1997 were $2,160,000 and $949,000, respectively, which were paid by Congoleum's insurance carriers, as were the related defense costs. The average indemnity cost per resolved claim was $11,000 in 1998 and $7,000 in 1997, all of which costs were covered by our insurance carriers. Costs per claim vary depending on a number of factors, including the number of plaintiffs, the nature of their alleged exposure and the location of the claim. Nearly all claims allege that various diseases or health issues were contracted as a result of exposure to asbestos in the course of their activities either as independent contractors or as employees of shipyards or other industries utilizing asbestos-containing products (or, in the workers' compensation cases, as employees of Congoleum) and that included among such products which allegedly caused their diseases were sheet products provided by Congoleum or resilient tile provided by the Amtico Tile Division of ABI (the "Tile Division") or both. Congoleum discontinued the manufacture of asbestos-containing sheet products in 1983, and the Tile Division ceased manufacturing asbestos-containing tile products in 1984. In general, asbestos-containing products have not been found to pose a health risk unless significant amounts of free asbestos fibers become airborne. All 48 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Commitments and Contingencies (continued) of the asbestos in asbestos-containing sheet and tile products sold by Congoleum or the Tile Division was fully bonded or encapsulated during the manufacturing process. Congoleum has issued warnings not to remove asbestos-containing flooring by sanding or other methods that do not comply with governmental asbestos-handling standards. In one of the cases tried before a jury in Superior Court of California in Los Angeles held in May and June 1997, Congoleum and another defendant were found liable for $3.3 million in damages, subject to proportional liability under California law. Congoleum had previously settled one count for an immaterial amount and had gone to trial for the remaining counts. The jury found that Congoleum was liable for only 25% of the plaintiff's non-economic damages but, as a result of post-verdict motions, the trial judge granted plaintiff's motion for judgment notwithstanding the verdict and held that California Proposition 51 (establishing proportionate liability for non-economic damages) did not apply in this case. Congoleum and the other defendant have appealed this decision. Congoleum's insurance carrier has paid for the defense costs incurred and has indicated that it would be responsible for paying the ultimate judgment in the case, subject to certain limitations. At December 31, 1998, Congoleum has accrued approximately $6.9 million for costs related to asbestos product liability. Estimated insurance coverage of $3.3 million has been recorded in other noncurrent assets at December 31, 1998 and are considered probable of recovery. Although there can be no assurance, Congoleum believes, based upon the nature of its asbestos-containing products and its experience with cases to date, that any potential liability from pending personal injury claims relating to Congoleum's asbestos-containing products will not have a material adverse effect on the financial position of Congoleum. 49 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Commitments and Contingencies (continued) The total balances of environmental and asbestos-related liabilities and the related insurance receivables deemed probable of recovery at December 31 for Congoleum are as follows: 1998 1997 Liability Receivable Liability Receivable ---------------------------------------------- (In thousands) Asbestos product liability $ 9,200 $2,900 $ 7,900 $1,400 Environmental liabilities 6,900 3,300 6,600 3,300 Other 1,100 - 500 - ---------------------------------------------- Total $17,200 $6,200 $15,000 $4,700 ============================================== Other In the ordinary course of its business, ABI and Congoleum become involved in lawsuits, administrative proceedings, product liability and other matters. In some of these proceedings, plaintiffs may seek to recover large and sometimes unspecified amounts, and the matters may remain unresolved for several years. On the basis of information furnished by counsel and others, ABI and Congoleum do not believe that these matters, individually or in the aggregate, will have a material adverse effect on their business or financial condition. 50 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1998 and 1997 were as follows: 1998 1997 ------------------------ (In thousands) Deferred tax assets: Accruals and reserves $21,959 $21,414 Credit carryforwards 336 1,178 ------------------------ Total deferred tax assets 22,295 22,592 Deferred tax liabilities: Depreciation 14,212 12,723 Insurance 3,438 2,661 Inventory 2,538 1,211 Undistributed domestic earnings 2,517 2,038 Foreign taxes 1,087 991 Other 1,640 1,560 ------------------------ Total deferred tax liabilities 25,432 21,184 ------------------------ Net deferred tax (liability) asset $(3,137) $ 1,408 ======================== Credit carryforwards consist primarily of alternative minimum tax credits and foreign tax credits. The components of earnings before income taxes for the year ended December 31 are: 1998 1997 1996 ------------------------------------- (In thousands) Domestic $21,722 $16,849 $20,037 Foreign 3,280 2,446 1,937 ------------------------------------- $25,002 $19,295 $21,974 ===================================== 51 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Income Taxes (continued) Significant components of the provision for income taxes for the year ended December 31 were as follows: 1998 1997 1996 ------------------------------------ (In thousands) Current: Federal $3,087 $6,346 $5,887 Foreign 1,185 931 339 State 265 566 711 ------------------------------------ Total current 4,537 7,843 6,937 Deferred 5,144 (470) 1,934 ------------------------------------ $9,681 $7,373 $8,871 ==================================== Deferred income taxes include provisions of $479,000, $301,000 and $532,000 during 1998, 1997 and 1996, respectively, for ABI's share of the undistributed earnings of Congoleum, which does not file a consolidated tax return with ABI. The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax expense for the year ended December 31 is: 1998 1997 1996 ------------------------------------ U.S. statutory rate 35% 34% 35% State income taxes, net of federal benefits 2 3 4 Undistributed domestic earnings 2 1 2 Other - - (1) ------------------------------------ Effective tax rate 39% 38% 40% ==================================== 52 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Income Taxes (continued) Undistributed earnings of foreign subsidiaries aggregated approximately $17,211,000 at December 31, 1998, which, under existing law, will not be subject to U.S. tax until distributed as dividends. Because the earnings have been or are intended to be indefinitely reinvested in foreign operations, no provision has been made for U.S. income taxes that may be applicable thereto. Income taxes paid amounted to approximately $6,160,000 in 1998, $5,727,000 in 1997, and $4,526,000 in 1996. 12. Other Comprehensive Income As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components; however, the adoption of this Statement has no impact on the Company's net income or shareholders' equity. SFAS No. 130 requires unrealized gains or losses on available-for-sale securities, foreign currency translation adjustments and changes in certain minimum pension liabilities, which, prior to adoption, were reported separately in stockholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. Components of other comprehensive income (loss) for the year ended December 31 consisted of the following: 1998 1997 1996 ------------------------------------ (In thousands) Foreign currency translation adjustments $(1,024) $(838) $ 413 Change in minimum pension liability (577) 331 (432) ------------------------------------ $(1,601) $(507) $ (19) ==================================== 53 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. Other Comprehensive Income (continued) Accumulated balances related to each component of other comprehensive income as of December 31 are as follows: 1998 1997 1996 ------------------------------------ (In thousands) Foreign currency translation adjustments $(3,783) $(2,759) $(1,921) Minimum pension liability (1,123) (546) (877) ------------------------------------ $(4,906) $(3,305) $(2,798) ==================================== 13. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the year ended December 31: 1998 1997 1996 ----------------------------------- (In thousands, except per share amounts) Numerator: Net income $ 9,002 $ 8,145 $ 6,299 ----------------------------------- Denominator: Denominator for basic earnings per share: Weighted-average shares 3,641 3,633 3,645 Dilutive employee stock options 165 105 84 ----------------------------------- Denominator for diluted earnings per share: Adjusted weighted-average shares and assumed conversions 3,806 3,738 3,729 =================================== Basic earnings per share $ 2.47 $ 2.24 $ 1.73 =================================== Diluted earnings per share $ 2.36 $ 2.18 $ 1.69 =================================== Options to purchase 238,000 and 238,500 shares of common stock at $23.63 per share were outstanding during 1998 and 1997, respectively, but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. 54 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 14. Stock Option Plans ABI Stock Plans During 1993, ABI adopted a stock award and incentive plan which permits the issuance of options, stock appreciation rights (SARs), limited SARs, restricted stock, restricted stock units and other stock-based awards to selected employees and independent contractors of the Company. The plan reserved 400,000 shares of common stock for grant and provides that the term of each award be determined by the committee of the Board of Directors (Committee) charged with administering the plan. During 1997, the Board of Directors approved an amendment to the plan to increase the number of shares reserved for grant from 400,000 to 550,000. Under the terms of the plan, options granted may be either nonqualified or incentive stock options and the exercise price, determined by the Committee, may not be less than the fair market value of a share on the date of grant. SARs and limited SARs granted in tandem with an option shall be exercisable only to the extent the underlying option is exercisable and the grant price shall be equal to the exercise price of the underlying option. In addition, the Committee may grant restricted stock to participants of the plan at no cost. No SARs or restricted stock have been granted under the plan since its adoption. Other than the restrictions which limit the sale and transfer of these shares, participants are entitled to all the rights of a shareholder. During 1985, ABI adopted a stock option plan which permits the issuance of 300,000 shares of common stock to key executives. Under the terms of the plan, options granted may be either nonqualified or incentive stock options and are issued at prices ranging from 85% to 100% of fair market value at the date of grant. Options granted under the plan are exercisable in installments; however, no options are exercisable within one year or later than ten years from the date of grant. 55 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 14. Stock Option Plans (continued) The following tables summarize information about ABI's fixed stock options:
1998 1997 1996 --------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------------------------------------------------------------------------- Outstanding at beginning of year 574,580 $18.79 342,640 $15.60 349,440 $15.17 Granted - 238,500 23.63 - - Exercised (44,500) 16.73 (6,560) 13.56 (5,800) 6.76 Forfeited - - - (1,000) 7.00 ------------ ----------- ------------- Outstanding at end of year 530,080 18.97 574,580 18.79 342,640 15.60 ============ =========== ============= Options exercisable at end of year 373,397 312,932 227,024 Available for grant at end of year 19,340 19,340 107,840
Number Number Outstanding at Exercisable at Weighted-Average Option December 31 December 31 Remaining Exercise Grant Date 1998 1998 Contractual Life Price - - ----------------------------------------------------------------------------------------------- May 1991 50,400 50,400 2.42 years $ 7.00 August 1993 241,680 241,680 4.75 years 16.88 April 1997 238,000 81,317 8.33 years 23.63
Congoleum Stock Option Plan Effective with its public offering, Congoleum adopted the 1995 stock option plan (the plan). Under the plan, options to purchase up to 800,000 shares of Congoleum's Class A common stock may be issued to officers and key employees. These options may be either incentive stock options or nonqualified stock options, and the option price must be at least equal to the fair value of Congoleum's Class A common stock on the date of grant. All options granted have ten-year terms and vest over five years at the rate of 20% per year beginning on the first anniversary of the date of grant. 56 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 14. Stock Option Plans (continued) The following table summarizes information about Congoleum's fixed stock options:
1998 1997 1996 -------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------------------------------------------------------------------------- Outstanding at beginning of year 511,900 $13.01 484,500 $12.89 481,000 $13.00 Granted 345,000 9.00 56,000 14.25 22,000 10.63 Exercised - - (2,000) 13.00 - Forfeited (230,900) 12.72 (26,600) 13.53 (18,500) 13.00 ----------- ------------ ------------ Outstanding at end of year 626,000 10.91 511,900 13.01 484,500 12.89 =========== ============ ============ Options exercisable at end of year 180,000 185,200 94,100 Available for grant at end of year 172,000 286,100 65,500
Pro Forma Disclosure Pro forma disclosure, as required by SFAS No. 123, regarding net income and earnings per share has been determined as if the Company had accounted for its employee stock options under the fair value method of the Statement. The fair value for the ABI options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997: risk-free interest rate of 6.69%, expected dividend yield of 12.70%, volatility factor of the expected market price of the Company's common stock of .288, and a weighted-average expected life of the options of seven and a half years. 57 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 14. Stock Option Plans (continued) The fair value for the Congoleum options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: option forfeiture of 15%, risk-free interest rates of 4.80%, 5.76% and 5.99%, no dividends, volatility factors of the expected market price of Congoleum's common stock of .365, .356 and .388, and a weighted-average expected life of the options of seven years. The weighted-average fair value of options granted under ABI's 1993 Stock Award and Incentive Plan during 1997 was $1.25. The weighted-average fair value of options granted under Congoleum's 1995 Stock Option Plan during 1998, 1997 and 1996 was $4.72, $4.34 and $4.68, respectively. For purposes of pro forma disclosures, the estimated fair value of the ABI and Congoleum options is amortized to expense over the options' vesting period. The impact on pro forma net income may not be representative of compensation expense in future years, when the effect of the amortization of multiple awards would be reflected in the pro forma disclosures. The Company's pro forma information follows: 1998 1997 1996 -------------------------------------- (In thousands, except per share amounts) Net income $9,002 $8,145 $6,299 Estimated pro forma compensation expense from stock options (355) (332) (257) -------------------------------------- Pro forma net income $8,647 $7,813 $6,042 ====================================== Pro forma earnings per share Basic $ 2.38 $ 2.15 $ 1.66 Diluted 2.27 2.09 1.62 58 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Industry Segments Description of Products and Services The Company has four reportable segments: flooring products, tape products, jewelry and a Canadian division which produces flooring and rubber products. Congoleum represents the Company's flooring products segment, which manufactures vinyl and vinyl composition floor coverings with distribution primarily through floor covering distributors, retailers and contractors for commercial and residential use. The tape products segment consists of two production facilities in the United States and finishing and sales facilities in Belgium and Singapore. The tape products segment manufactures paper, film, HVAC, electrical, shoe and other tape products for use in industrial and automotive markets. The jewelry segment reflects the results of K&M Associates L.P., a national costume jewelry supplier to the mass merchandiser markets. The Company's Canadian division produces flooring, rubber products, including materials used by footwear manufacturers, and other industrial products. Measurement of Segment Profit or Loss and Segment Assets The Company considers all revenues and expenses to be of an operating nature and, accordingly, allocates them to industry segments regardless of the profit center in which recorded. Costs specific to a segment, such as pension expense, are charged to the segment. Corporate office expenses are allocated to certain segments based on resources allocated. All assets, except investment in Hulera Sula, are considered operating assets. Significant assets of the Corporate office include cash, deferred tax assets, goodwill, and investment in Hulera Sula. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are recorded at cost plus an agreed upon intercompany profit on intersegment sales or transfers. Factors Used to Identify Reportable Segments Reportable segments are business units that offer different products and are each managed separately. The Company's Canadian division manufactures certain products which are similar to products of the flooring segment; however, the Canadian division is managed and reports separately from the flooring segment. 59 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Industry Segments (continued) Segment Profit and Assets Year ended December 31 1998 1997 1996 ----------------------------- Revenues (In thousands) Revenues from external customers: Flooring products $258,258 $251,562 $268,237 Tape products 82,233 83,389 78,567 Jewelry 47,350 44,537 34,372 Canadian division 36,038 38,024 36,785 ----------------------------- Total revenues from external customers 423,879 417,512 417,961 Intersegment revenues: Flooring products 868 964 1,214 Tape products 193 162 124 Jewelry - - - Canadian division 6,613 5,110 5,485 ----------------------------- Total intersegment revenues 7,674 6,236 6,823 ----------------------------- 431,553 423,748 424,784 Reconciling items Intersegment revenues (7,674) (6,236) (6,823) ============================= Total consolidated revenues $423,879 $417,512 $417,961 ============================= Approximately 50%, 50% and 51% of the Canadian division's revenues from external customers were for flooring products for 1998, 1997 and 1996, respectively. The remaining revenues from the Canadian division's external customers were from sale of rubber and other industrial products. 60 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Industry Segments (continued) Year ended December 31 1998 1997 1996 ---------------------------- (In thousands) Interest revenue Flooring products $ 1,607 $ 1,539 $ 1,784 Tape products 22 15 8 Jewelry 61 - - Canadian division 163 87 3 ---------------------------- Total segment interest revenue 1,853 1,641 1,795 Reconciling items Corporate office interest revenue 37 23 12 Intersegment interest revenue (100) (38) - ---------------------------- Total consolidated interest revenue $ 1,790 $ 1,626 $ 1,807 ============================ Interest expense Flooring products $ 7,365 $ 6,797 $ 8,153 Tape products 74 - 8 Jewelry 1,312 1,654 1,712 Canadian division 1 4 134 ---------------------------- Total segment interest expense 8,752 8,455 10,007 Reconciling items Corporate office interest expense 391 927 740 Intersegment interest expense (100) (38) - ---------------------------- Total consolidated interest expense $ 9,043 $ 9,344 $10,747 ============================ Depreciation and amortization expense Flooring products $10,741 $10,346 $ 9,783 Tape products 1,979 1,831 1,664 Jewelry 239 237 258 Canadian division 1,494 1,395 1,502 ---------------------------- Total segment depreciation and amortization 14,453 13,809 13,207 Reconciling items Corporate office depreciation and amortization 675 692 667 ---------------------------- Total consolidated depreciation and amortization $15,128 $14,501 $13,874 ============================ 61 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Industry Segments (continued) Year ended December 31 1998 1997 1996 ---------------------------- (In thousands) Segment profit (loss) Flooring products $15,516 $11,055 $19,995 Tape products 3,797 4,512 5,000 Jewelry 2,657 2,731 (3,342) Canadian division 3,095 2,879 1,253 ---------------------------- Total segment profit 25,065 21,177 22,906 Reconciling items Corporate office profit or loss (4) (1,940) (694) Intercompany profit or loss (59) 58 (238) ---------------------------- Total consolidated earnings before income taxes and other items $25,002 $19,295 $21,974 ============================ Segment profit or loss is before income tax expense or benefit and extraordinary items. In 1998 and 1997, the flooring segment recorded a loss on early retirement of debt, net of income tax benefit, of $2,413,000 and $279,000, respectively. The extraordinary losses are not included in the segment profit for 1998 and 1997 disclosed above. Year ended December 31 1998 1997 1996 ------------------------------ (In thousands) Segment assets Flooring products $231,865 $196,581 $219,798 Tape products 48,308 47,728 50,727 Jewelry 16,298 18,074 19,306 Canadian division 20,710 20,179 20,455 ------------------------------- Total segment assets 317,181 282,562 310,286 Reconciling items Corporate office assets 29,446 32,606 34,270 Intersegment accounts receivable (10,436) (15,389) (19,439) Intersegment profit in inventory (152) (93) (151) ------------------------------- Total consolidated assets $336,039 $299,686 $324,966 =============================== 62 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Industry Segments (continued) Year ended December 31 1998 1997 1996 ---------------------------- (In thousands) Expenditures for additions to long-lived assets Flooring products $ 9,440 $19,767 $12,817 Tape products 4,396 1,249 5,700 Jewelry 613 112 87 Canadian division 2,693 1,038 1,237 ---------------------------- Total expenditures for additions to long-lived assets 17,142 22,166 19,841 Reconciling items Corporate office expenditures for additions to long-lived assets 13 17 28 ---------------------------- Total expenditures for additions to long-lived assets $17,155 $22,183 $19,869 ============================ Geographic Area Information Year ended December 31 1998 1997 1996 ------------------------------ (In thousands) Revenues from external customers United States $363,742 $353,325 $359,252 Canada 31,314 35,667 32,002 Europe 16,225 16,000 15,459 Asia 7,397 8,676 8,066 Other 5,201 3,844 3,182 ------------------------------ Total revenues from external customers $423,879 $417,512 $417,961 ============================== Revenues are attributed to countries based on the location of customers. 63 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Industry Segments (continued) December 31 1998 1997 1996 ----------------------------- (In thousands) Long-lived assets by area United States $150,079 $147,707 $137,018 Canada 8,284 7,549 8,234 Europe 1,275 622 678 Asia 2,561 170 243 ============================= Total long-lived assets $162,199 $156,048 $146,173 ============================= During 1998, the Company acquired buildings in Belgium and Singapore (see Note 6). 16. Quarterly Financial Information (Unaudited) First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------ (In thousands of dollars, except per share amounts) 1998 Net sales $106,388 $108,501 $110,681 $ 98,309 Gross profit 31,578 34,354 35,401 32,039 Net earnings 1,325 2,101 1,821 3,755 Net earnings per share: Basic .36 .58 .50 1.03 Diluted .35 .55 .48 1.00 In the third quarter of 1998, ABI recorded an extraordinary loss in the amount of $1,174 to recognize its share of Congoleum's loss on early retirement of debt, net of income tax benefit. Basic and diluted earnings per share before extraordinary item for the third quarter ended October 3, 1998 were $.82 and $.79, respectively 64 American Biltrite Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 16. Quarterly Financial Information (Unaudited) First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------ (In thousands of dollars, except per share amounts) 1997 Net sales $95,513 $101,592 $120,036 $100,371 Gross profit 28,570 31,378 38,420 29,405 Net earnings 47 884 4,820 2,394 Net earnings per share: Basic .01 .24 1.33 .66 Diluted .01 .24 1.31 .64 65 American Biltrite Inc. and Subsidiaries Schedule II--Valuation and Qualifying Accounts Year ended December 31, 1998, 1997 and 1996
(Dollars in thousands) - - --------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E COL. F COL. G - - --------------------------------------------------------------------------------------------------------------------- Additions ----------------------------------- Charged to Balance at Charged to Other Beginning of Costs and Accounts-- Deductions-- Balance at Description Period Expenses Describe Other Describe End of Period - - --------------------------------------------------------------------------------------------------------------------- 1998 Allowances for doubtful accounts and cash discounts $5,052 $ 2,411 $ 2,339(A) $5,124 ================================================================================ Reserve for returns and markdowns $3,141 $12,318 $12,619(A) $2,840 ================================================================================ 1997 Allowances for doubtful accounts and cash discounts $4,935 $ 2,433 $ 2,316(A) $5,052 ================================================================================ Reserve for returns and markdowns $3,880 $10,588 $11,327(A) $3,141 ================================================================================ 1996 Allowances for doubtful accounts and cash discounts $6,477 $ 2,885 $ 4,427(A) $4,935 ================================================================================ Reserve for returns and markdowns $3,301 $11,342 $10,763(A) $3,880 ================================================================================
(A) Represents accounts charged off during the year, net of recoveries 66 Pursuant to the requirement of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, AMERICAN BILTRITE INC. (Registrant) Date: March 9, 1999 by: /s/ Gilbert K. Gailius ----------------------------------- Gilbert K. Gailius, Vice President Finance, Chief Financial Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 9, 1999 by: /s/ Roger S. Marcus ----------------------------------- Roger S. Marcus, Chairman of the Board, Chief Executive Officer and Director Date: March 9, 1999 by: /s/ Richard G. Marcus ----------------------------------- Richard G. Marcus, President, Chief Operating Officer and Director Date: March 9, 1999 by: /s/ William M. Marcus ----------------------------------- William M. Marcus, Executive Vice President, Treasurer, Chairman of the Executive Committee and Director Date: March 9, 1999 by: /s/ John C. Garrels, 3rd ----------------------------------- John C. Garrels, 3rd, Director Date: March 9, 1999 by: /s/ Kenneth I. Watchmaker ----------------------------------- Kenneth I. Watchmaker, Director Date: March 9, 1999 by: /s/ Edward J. Lapointe ----------------------------------- Edward J. Lapointe, Controller 67 INDEX OF EXHIBITS Exhibit No. Description Page No. - - ----------- ----------- -------- 3(1) XI Restated Certificate of Incorporation - 3(2) IV By-Laws, amended and restated as of March 13, - 1991 10(3) I, V 1985 Stock Option Plan ("the 1985 Plan") - 10(4) II, V Form of Agreement pursuant to the 1985 Plan - providing for ISO's 10(5) III, V Form of Agreement pursuant to the 1985 Plan - providing for NQSO's 10(6) VI Joint Venture Agreement dated as of December 16, - 1992 by and among American Biltrite Inc., Resilient Holdings Incorporated, Congoleum Corporation, Hillside Industries Incorporated and Hillside Capital Corporation 10(7) VII Closing Agreement dated as of March 11, 1993 by - and among American Biltrite Inc., Resilient Holdings Incorporated, Congoleum Corporation, Hillside Industries Incorporated and Hillside Capital Corporation 10(8) XII, V 1993 Stock Award and Incentive Plan as Amended - and Restated as of March 4, 1997 10(9) IX K&M Associates L.P. Amended and Restated - Agreement of Limited Partnership 10(10) VIII Purchase Agreement dated as of March 31, 1995 by - and among Ocean State and certain limited partners of K&M 68 Page No. -------- 10(11) VIII Agreement and Plan of Merger dated as of April - 1, 1995 by and among the Company, Jewelco Acquisition Co., Inc., AIMPAR, Inc., Arthur I. Maier, Bruce Maier and Edythe J. Wagner 10(12) VIII Option Agreement dated as of April 1, 1995 by - and among Ocean State and certain limited partners of K&M 10(13) VIII Agreement and Plan of Merger dated as of May 3, - 1995 by and among the Company, Zirconia Acquisition Co., Inc., Wilbur A. Cowett Incorporated and Wilbur A. Cowett 10(14) X, V Split-Dollar Agreement dated as of December 20, - 1996 by and between American Biltrite Inc. and Michael J. Glazerman, Trustee of the Marcus Family Insurance Trust u/t/d March 1, 1990 10(15) X, V Split-Dollar Agreement dated as of December 20, - 1996 by and between American Biltrite Inc. and the Marcus Family 1990 Insurance Trust 10(16) X, V Split-Dollar Agreement dated as of December 20, - 1996 by and between American Biltrite Inc. and the Marcus Family 1996 Irrevocable Insurance Trust Dated October 28, 1996 10(17) X, V Split-Dollar Agreement dated as of December 20, - 1996 by and between American Biltrite Inc. and The Richard G. Marcus Irrevocable Insurance Trust of 1990 Dated June 1, 1990 69 Page No. -------- 10(18) X, V Split-Dollar Agreement dated as of December 20, - 1996 by and between American Biltrite Inc. and the Roger S. Marcus Irrevocable Insurance Trust Dated Nov. 29, 1996, Richard G. Marcus, Trustee 10(19) X, V Split-Dollar Agreement dated as of December 20, - 1996 by and between American Biltrite Inc. and the Roger S. Marcus Irrevocable Insurance Trust Dated Nov. 29, 1996 10(20) X, V Split-Dollar Agreement dated as of January 9, - 1997 by and between American Biltrite Inc. and Joseph D. Burns 10(21) X, V Description of Supplemental Retirement Benefits - for Gilbert K. Gailius 11 XI Statement Re: Computation of Per Share Earnings - 21 Subsidiaries of the Registrant (including each 72-73 subsidiary's jurisdiction of incorporation and the name under which each subsidiary does business) 23(1) Consent of Ernst & Young LLP, Independent 74 Auditors 27 Financial Data Schedule, filed herewith - 70 - - ---------- I Incorporated by reference to exhibit 10(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986. (1-4773) II Incorporated by reference to exhibit 10(3) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986. (1-4773) III Incorporated by reference to exhibit 10(4) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986. (1-4773) IV Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. (1-4773) V Compensatory plans required to be filed as exhibits pursuant to Item 14(c) of Form 10-K. VI Incorporated by reference to the exhibits filed with the Company's Current Report on Form 8-K filed December 21, 1992. (1-4773) VII Incorporated by reference to the exhibits filed with the Company's Current Report on Form 8-K filed March 25, 1993. (1-4773) VIII Incorporated by reference to the exhibits to the Company's Current Report on Form 8-K as amended by the Form 8-K/A filed respectively on May 17, 1995 and July 17, 1995. IX Incorporated by reference to Item 14 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. X Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. XI Incorporated by reference to Note 12 of the Company's consolidated financial statements (filed herewith). XII Incorporated by reference to the exhibits to the Company's Quarterly Report on Form 10-Q filed on June 28, 1997. 71 EX-21 2 SUBSIDIARIES OF THE REGISTRANT Exhibit No. 21 SUBSIDIARIES OF THE REGISTRANT Effective as of March 25, 1999 Name Jurisdiction ---- ------------ American Biltrite (Canada) Ltd. Canada 200 Bank Street Sherbrooke, Quebec JIH 4K3 also doing business in Canada as Produits American Biltrite Ltee American Biltrite Far East, Inc. Delaware 57 River Street Wellesley Hills, Massachusetts 02481 American Biltrite Sales Corporation Virgin Islands 57 River Street Wellesley Hills, Massachusetts 02481 Majestic Jewelry, Inc. Delaware 57 River Street Wellesley Hills, Massachusetts 02481 Ocean State Jewelry, Inc. Rhode Island 57 River Street Wellesley Hills, Massachusetts 02481 Aimpar, Inc. New York 57 River Street Wellesley Hills, Massachusetts 02481 ABTRE, Inc. Tennessee 57 River Street Wellesley Hills, Massachusetts 02481 Ideal Tape Co., Inc. Delaware 1400 Middlesex Street Lowell, Massachusetts 01851 American Biltrite Intellectual Properties, Inc. Delaware 103 Foulk Road Suite 200 Wilmington, Delaware 19803 72 K & M Trading (H.K.) Limited Hong Kong 1001 Hutchison House 10 Harcourt Road Hong Kong Congoleum Corporation Delaware 3705 Quakerbridge Road Mercerville, New Jersey 08619 ABItalia, Inc. Delaware 57 River Street Wellesley Hills, Massachusetts 02481 73 EX-23.1 3 CONSENT OF INDEPENDENT AUDITORS Exhibit 23(1) Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-11879) pertaining to the 1985 Stock Option Plan of American Biltrite Inc. and the Registration Statement (Form S-8 No. 33-77318) pertaining to the 1993 Stock Award and Incentive Plan of American Biltrite Inc. of our report dated March 8, 1999, with respect to the consolidated financial statements and schedule of American Biltrite Inc. and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1998. ERNST & YOUNG LLP Boston, Massachusetts March 23, 1999 74 EX-27 4 FDS
5 (Replace this text with the legend) 0000004611 American Biltrite Inc. 1,000 U.S. Dollars 12-MOS DEC-31-1998 JAN-01-1999 DEC-31-1998 1 59,505 0 33,551 5,124 69,722 171,977 123,770 0 336,039 75,229 0 0 0 46 71,191 336,039 423,879 427,551 290,507 402,549 0 0 9,043 25,002 9,681 15,321 0 (1,174) 0 9,002 2.47 2.36
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